U.S. Markets open in 9 hrs 11 mins

Edited Transcript of LM earnings conference call or presentation 26-Apr-17 9:00pm GMT

Thomson Reuters StreetEvents

Q4 2017 Legg Mason Inc Earnings Call

BALTIMORE May 26, 2017 (Thomson StreetEvents) -- Edited Transcript of Legg Mason Inc earnings conference call or presentation Wednesday, April 26, 2017 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Alan F. Magleby

Legg Mason, Inc. - MD, Director of Communications and Director of IR

* Joseph A. Sullivan

Legg Mason, Inc. - Chairman, CEO and President

* Peter Hamilton Nachtwey

Legg Mason, Inc. - CFO and Senior EVP

================================================================================

Conference Call Participants

================================================================================

* Christopher Meo Harris

Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst

* Craig William Siegenthaler

Crédit Suisse AG, Research Division - Global Research Product Head for the Asset Management Industry

* Daniel Thomas Fannon

Jefferies LLC, Research Division - Senior Equity Research Analyst

* Glenn Paul Schorr

Evercore ISI, Research Division - Senior MD, Senior Research Analyst and Fundamental Research Analyst

* Macrae Sykes

G. Research, LLC - Research Analyst

* Michael J. Cyprys

Morgan Stanley, Research Division - Executive Director and Senior Research Analyst

* Michael Roger Carrier

BofA Merrill Lynch, Research Division - Director

* Patrick Davitt

* Robert Andrew Lee

Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to the Legg Mason Fourth Quarter and Fiscal 2017 Year-End Earnings Call. My name is Nicole, and I'll be your operator for today's teleconference. (Operator Instructions) Please note that this teleconference is being recorded. It is now my pleasure to introduce your host, Alan Magleby, Head of Investor Relations and Corporate Communications. Thank you. Mr. Magleby, you may begin.

--------------------------------------------------------------------------------

Alan F. Magleby, Legg Mason, Inc. - MD, Director of Communications and Director of IR [2]

--------------------------------------------------------------------------------

Thank you. On behalf of Legg Mason, I would like to welcome you to our conference call to discuss operating results for the fiscal 2017 fourth quarter and the fiscal year ended March 31, 2017. This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not statements of facts or guarantees of future performance and are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those discussed in the statements. For a discussion of these risks and uncertainties, please see risk factors and management's discussion and analysis of financial condition and results of operations in the company's annual report on Form 10-K for the fiscal year ended March 31, 2016, and in the company's subsequent filings with the Securities and Exchange Commission.

During the call today, we may also discuss non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the comparable GAAP financial measures can be found in the press release that we issued this morning, which is available in the Investor Relations section of our website. The company undertakes no obligation to update the information contained in this presentation to reflect subsequently occurring events or circumstances.

This afternoon's call will include remarks from Mr. Joe Sullivan, Legg Mason's Chairman and CEO; and Mr. Pete Nachtwey, Legg Mason's CFO, who will discuss our financial results. In addition, following the review of the company's quarter, we will then open the call to Q&A.

Now I would like to turn this call over to Mr. Joe Sullivan. Joe?

--------------------------------------------------------------------------------

Joseph A. Sullivan, Legg Mason, Inc. - Chairman, CEO and President [3]

--------------------------------------------------------------------------------

Thanks, Alan, and thank you for listening in this afternoon. As always, we appreciate your interest in Legg Mason. As we've stated in the past, our industry is rapidly changing. And while there are disruptive forces at work, we are managing through these changes as well as markets that, at times, are more challenging than they may appear to be.

As we look back on our fiscal year just ended, we are very pleased with the strategic progress we have made, yet we know that more work needs to be done. I want to begin today by reminding you of our strategy: Expanding client choice through diversification. Underpinning this strategy is the belief that we must provide our clients with the products that they want and need, delivered in the vehicles that they prefer and accessible in the manner in which they choose. It is through this constant focus on choice through diversification that we are beginning to see our results play out with both a strong fourth quarter finish and a strong agenda in place for fiscal 2018.

I'd like to start by emphasizing the following 3 focus points for the past quarter. First, our long-term net inflows were our best in the past 2 years, and we also had our best net equity flow quarter in over 12 years. These results, led by fixed income inflows at both Western and Brandywine and equity inflows at ClearBridge and Martin Currie, were offset to a degree by outflows in alternatives. Our net inflows are juxtaposed against the backdrop of another rough quarter for the industry in net active flows and a record quarter for flows in the passive strategies.

Our flow performance supports 2 things that we've been saying for some time now, specifically that our strategy of diversification can work, not only for clients but for shareholders as well. And while not growing sectors, classic active equity and fixed income are substantial in size and still very attractive spaces. But winning in them requires relevant investment strategies that deliver performance alpha, access through competitively priced products and vehicles and delivered through differentiated distribution channels. On those 3 scores, across both equity and fixed income, we fair well.

My second focus point relates to our global distribution platform, which -- depending upon which metric we consider, had either its best or second-best quarter and year ever. This performance underscores the importance of the Legg Mason distribution platform for our shareholders. Our global distribution team has delivered net positive flows across the platform in 13 of the last 14 quarters, which is nothing short of a stellar performance during a period of significant investor shifts from active to passive strategies. This year saw all-time highs in net sales for Martin Currie, in Legg Mason Japan and in the SMA vehicle.

In the U.S., our wirehouse and independent channels both achieved record gross sales, as AUM on the global platform was also an all-time high. So fiscal 2017 was a very successful year for our distribution team, one, that, that team has characterized as directly related to our platform of choice being increasingly appreciated within this consolidating environment.

My third point of emphasis is the diversity of our business both beyond traditional asset classes and vehicles and across all asset classes and vehicles. To that end, and just for some perspective on the diversification at Legg Mason, almost half of U.S. gross sales on our retail platform during the quarter were products other than '40 Act mutual funds, specifically SMAs, sub-advice strategies, VITs and CITs. This reinforces the importance of being able to respond to the retail investor's demand for choice and product vehicles. Now, obviously, our mutual fund business is a large and very important business for our clients and for Legg Mason, but investor vehicle preferences are evolving and expanding. They demand more choice in their investment vehicles, and this demand drives our vehicle innovation and development agenda.

As an example, last year, of all the products we launched in the U.S., only about 10% were in the traditional mutual fund vehicle. And as we look ahead to a robust pipeline of new products in multiple vehicles planned in the U.S. this coming year, most will be in ETFs and SMAs, and none are expected to be in the mutual fund format.

So we close the fiscal year having completed a significant number of strategic initiatives that we expect to bear fruit going forward. We closed 4 transactions during the year and very successfully onboarded Clarion Partners and helped to facilitate the merger of EnTrust Capital with Permal. We closed the acquisition of Financial Guard, signing in November the first financial intermediary on our new technology platform to help them deliver advisory solutions to their clients. We also had a very active year with Precidian, following our investment in the company in 2016. NYSE Arca and Precidian have filed a 19b-4 for new ETF products, utilizing their ActiveShares technology that will be subadvised by ClearBridge and Royce.

The SEC has approved Precidian's exemptive relief application, pending a standard comment period for an active hedged ETF structure for ADRs. We believe that the demand for this product will be strong. And finally, we also filed registration statements for 3 transparent active ETFs with the underlying managers from ClearBridge.

All in all, a very busy and successful year of onboarding new partners, developing new strategies and vehicles and achieving strong performance through our global retail platform. And as we delivered on these strategic initiatives, we continue to lead our industry in the rate of capital return to shareholders through share repurchases and dividends. Our recent history of which is powerfully captured on Slide 2.

Speaking of our dividend, I am very pleased to share with you that we are raising our dividend by 27% to $1.12 per share. This increase is part of the ongoing focus that we place on thoughtful capital allocation. In the past, we have considered our share repurchase and dividend payout somewhat separate and distinct. But going forward, we intend to think about them collectively in terms of total capital allocated. So for this fiscal year, from where we sit now, we intend to maintain an approximate total capital return to shareholders of $450 million, subject, as always, to there not being more compelling uses of capital. With such a program, we should remain a leader in the rate of capital return to shareholders.

There will be a slight difference in the mix, however, which will shift from about an 80-20 share repurchase to dividend ratio to a 75-25. This strategic move towards a slightly higher dividend payout ratio and yield positions us more competitively in our industry peer group.

As is typical, we have highlighted specific details for the quarter on Slide 3 as well as AUM and flows by affiliate on Slide 4, our global distribution review on Slide 5, and finally, our updated investment performance on Slide 6. I'll be happy to answer specific questions about our investment affiliates that you may have. But suffice it to say that while all of our affiliates inevitably have periods of uneven performance or choppy flows, almost all of them currently have a higher level of activity or greater pipelines of opportunity across more geographies and strategies than we have seen in some time. This level of activity, when combined with the work underway in global distribution, is why we are confident that we can continue to take share in a challenging market. All that said, as we have cautioned before, please do not make too much or too little out of our monthly flows. As we've seen, those flows can be lumpy in the short term.

And finally, as is customary for us in this quarter each year, we've included a slide that captures many of the acknowledgments and awards earned by Legg Mason and our affiliates during the fiscal year. And I'd like to congratulate my colleagues for these important recognitions.

And with that backdrop, let me turn it over to Pete.

--------------------------------------------------------------------------------

Peter Hamilton Nachtwey, Legg Mason, Inc. - CFO and Senior EVP [4]

--------------------------------------------------------------------------------

Thanks, Joe. I'll start off on Slide 8. As Joe noted, for the quarter, we generated earnings of $76 million or $0.76 per diluted share. And I realize, there is a lot of noise embedded in this quarter, but that is largely a product of the actions we've taken to streamline our business and invest for growth. So let me walk you through the various items, which we believe will help you see that our core business had a solid quarter from an ongoing operations perspective.

First, we enjoyed a positive $15 million impact, resulting from the recognition of a U.S. tax credit related to foreign taxes paid in prior periods. Also on the plus side, were gains from the sale of LMM and Glouston Capital Partners totaling $5 million. On the other side of the ledger, we incurred a $5 million noncash accounting charge related to units issued under the Royce management equity plan. As you may recall, the Royce MEP effectively equitizes a portion of their team's revenue share. And as a reminder, in return for putting that plan in place, we have already received one additional revenue share percentage point, and we'll receive an additional 1% of revenue share from Royce, effective from April 1, 2017.

Looking ahead, Royce still has an additional 3% of their revenue share, which they may equitize in the future. We also incurred a $3 million severance charge associated with the corporate headcount reductions, which were disclosed last month. And this quarter's earnings per share included $2 million of EnTrustPermal transition-related costs.

Finally, there was a $2 million noncash charge related to our revolving credit facility amendment, reducing the capacity on that facility back to our historical level of $500 million. This will save us roughly $1.5 million in annual expenses through 2020. So piercing through all that noise, these items collectively increased earnings per share by $0.11 for the quarter.

Now I'll turn to some other highlights for the quarter. Average AUM increased to $719 billion, driven by the increase in equity AUM. Our operating revenues increased $8 million from fiscal Q3, largely driven by higher average long-term AUM and higher pass-through performance fees at Clarion. These were partially offset by the impact of 2 fewer days in the quarter. And while impossible to predict with precision, we estimate next quarter's non-pass-through performance fees to be approximately $5 million, and pass-through performance fees at Clarion should add another $55 million to $60 million to fiscal Q1 performance fees.

Slide 9 highlights the EnTrustPermal related charges for this past fiscal year. For fiscal Q4, acquisition and transition-related expenses totaled $2 million, a bit lower than expected due to charges that were delayed until Q1 of fiscal 2018 where we anticipate additional charges of approximately $3 million.

And as noted in footnote 2, the current quarter includes $8 million in EnTrustPermal savings, up slightly from last quarter. This represents $32 million on an annualized basis with the full $35 million in annual savings expected in fiscal '18.

On Slide 10, there are a couple of items to highlight. Similar to the breakdown I provided earlier regarding our overall results, we thought it would helpful to call-out the various items impacting our operating income, specifically the reported number of $110 million was negatively impacted by the following: first, the $4.6 million in Royce noncash MEP charges; second, the $2.7 million in corporate severance cost; and finally, we experienced higher sales commissions of $3.5 million. The first 2 items are not expected to recur on a regular basis, and we, of course, love the higher sales commissions, as that means we have more AUM, which will be with us on average for the next 4 years.

Our GAAP effective tax rate was only 12% for the quarter as a result of the discrete tax items I mentioned earlier. As we look ahead to fiscal 2018, we project our GAAP tax rate to be between 31% and 33%, which you can see in the appendix on Slide 23. Our actual cash tax rate was 7%, which continues to run at a substantially lower level than our historical GAAP rate. And we anticipate that our cash tax rate will stay below 10% through the early part of the next decade, after which we will still continue to benefit from goodwill amortization well into the future.

On Slide 11, you can see that market appreciation, long-term inflows and positive FX combined increased AUM by $25 billion. Liquidity outflows totaled $3 billion, while the previously mentioned sales of several small subsidiaries further reduced our AUM by $3.9 billion.

Turning to Slide 12. Fixed income inflows were $3.5 billion, with positive flows at both Western and Brandywine. Equity inflows totaled $3.1 billion, driven by ClearBridge and Martin Currie. While alternative outflows increased to $2.7 billion with outflows across all 3 alternative managers. In the case of the real estate outflow, this was largely made up of an advisory mandate for a client where Clarion was over its allocation, and these advisory assets could be moved back to a self-managed bucket at that client. This will actually free up capacity for Clarion to work with this client on more accretive investments going forward.

We've updated Slide 13 by providing operating revenue yields by asset class to enhance our transparency on this key metric. As you can see, our operating revenue yield increased due to a higher average equity AUM, driven by both markets and flows. The historical trend shows alternative operating revenue yields declining over the period. This was driven by the lower fee levels associated with our 3 most recent acquisitions: RARE, Clarion and EnTrust. In all 3 cases, their fees are on balance lower than Permal on a stand-alone basis, which is what comprised our Alts platform prior to bringing these new affiliates on board.

Operating expense is on Slide 14 increased by $9 million. For last quarter, our intangible impairment was partially offset by contingent consideration credits, which combined to increase operating expenses by $20 million. This quarter, we saw an increase in comp and benefits of $19 million, $11 million of which related to the items I mentioned earlier, specifically the Royce MEP noncash charge, the cost related to our corporate headcount reductions and the higher sales commissions. Occupancy increased by $3 million resulting from the combined impacts of an affiliate charge this quarter versus a transition-related real estate credit last quarter. And other expenses increased by $7 million due to higher spending on advertising, professional fees and an increase in the FX impact on expenses. Next quarter, we expect this other expense line to move back to the more typical $50 million per quarter level.

Turning to Slide 15. Comp and benefits, again, increased by $19 million, reflecting seasonal compensation influences, the Clarion performance pass-through, the Royce MEP charge, higher mark-to-market on deferred comp and seed and higher commissions on increased global distribution sales. Next quarter, we expect the comp ratio to be slightly higher in the range of 55% to 56%, reflecting higher payroll taxes associated with our annual incentive awards as well as the impact of accelerated charges related to retirement eligible employees who receive annual deferred compensation awards.

Slide 16 shows our operating margin as adjusted, which decreased from last quarter, reflecting the impact of 2 fewer days in the quarter and the various comp-related items I just mentioned. We expect next quarter's adjusted operating margin to improve, reflecting the absence of the various items impacting our current quarter, but partially offset by payroll taxes and other costs associated with our annual incentive awards in fiscal Q1.

I would also point you to Page 30 in the appendix, where you'll see an update to our parent operating margin, which we first disclosed last fall. You can see that our parent margin for fiscal 2017 increased 1.5% versus 2016, primarily reflecting the positive impacts from our recent acquisitions and the operating leverage in our model.

Slide 17 is a roll forward from fiscal Q3's net income of $0.50 to this quarter's net income of $0.76 per share. For our fiscal fourth quarter, lower operating earnings reduced EPS by $0.07, primarily due to the 2 fewer days in the quarter, lower non-pass-through performance fees and seasonal compensation costs. The increase in mark-to-market on our seed and corporate investments, which is not offset in comp as well as the impacts from lower taxes and our share buybacks, combined to increase earnings per share by $0.08 quarter-over-quarter.

Finally, the combination of the items I mentioned in my opening remarks increased earnings per share by $0.11.

Slide 18 is a walk of our adjusted EBITDA from fiscal Q3 to fiscal Q4. Note that our adjusted EBITDA decreased from $160 million to $146 million due to the impacts from various operating expense items and 2 fewer days in the quarter.

So now, let me turn it back over to Joe.

--------------------------------------------------------------------------------

Joseph A. Sullivan, Legg Mason, Inc. - Chairman, CEO and President [5]

--------------------------------------------------------------------------------

Thanks, Pete. I'm going to end with a slide that we have periodically shown over the past 4 years, which shows the many actions, both large and small, that we have taken to reposition Legg Mason for the future. All of these actions have supported our strategy of expanding client choice through diversification. The work to add new and relevant capabilities is largely done, and we are now focused on helping our individual affiliates fully leverage our global distribution platform, including utilizing their strategies in expanding customized solutions capabilities and multi-asset products. We remain committed to helping our clients achieve their goals by offering easily accessible choices and solutions in such a way that translates the disruption before us into opportunity, and we believe that this should reward our shareholders appropriately. So as always, we will continue to thoughtfully invest in our business, taking advantage of our global scale, our diversification and our financial strength to deliver long-term results for clients and shareholders.

And with that, we are happy to take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from Chris Harris with Wells Fargo.

--------------------------------------------------------------------------------

Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [2]

--------------------------------------------------------------------------------

My question is on ClearBridge. You guys obviously had really strong flows there and that is mostly large CapEx with equity, which we all know is under extreme pressure from passive. So other than performance, how are you guys able to achieve such a strong result there? We've seen some of your peers have had good performance, and they just can't seem to produce positive flows and active equity?

--------------------------------------------------------------------------------

Joseph A. Sullivan, Legg Mason, Inc. - Chairman, CEO and President [3]

--------------------------------------------------------------------------------

So I think, Chris, it's kind of what I said earlier. First of all, of the flows that ClearBridge had, which are approaching $3 billion for the quarter -- and by the way, that was the best net flow quarter that ClearBridge has had since we acquired them in 2005. So that's a pretty powerful statement. We had a significant win with a large -- with Vanguard. I mean, that was public information. And that's a very powerful and validating win for ClearBridge. And what we're excited about that, by the way, is that's a -- hopefully, a gift that will keep on giving. So in the sense that as Vanguard continues to grow that will hopefully continue to allocate into that particular fund and ClearBridge should benefit from that. And then the second thing with respect to ClearBridge is that their platform, the company itself has really been validated through that. So if and as Vanguard has more searches, we're hopeful that we'll have an even clear path because the fact that ClearBridge itself, it's risk management, it's a culture, all the kind of factors other than a particular strategy have been validated. Beyond that, there's roughly, I would say, 7 different categories where we saw inflows at ClearBridge for the quarter. So we had large cap growth, which was obviously significant, but also small and mid-cap growth, that was the Vanguard strategy. We saw multi-cap growth, we saw dividend strat, tactical dividend, which is one of their strategies and then a mid-cap and a small-cap strategy. So 7 or 8 different strategies that all had, I would say, $40 million to $50 million or more of net positive flows. What that tells you is you have diversified strategies, and this is one of the things we like best about ClearBridge. They're highly diversified. They attack the market or they provide solutions that are income, that are high conviction or high conviction-type strategies or also downside -- capture downside protection strategies. And so you combine relevant strategies, income, high conviction, downside capture strategies that meet different needs, you combine that with very good performance, and our investment performance has been strong, and you then combine that with a strong distribution capability, and those things ultimately result potentially in good flows. It's a market share game, and we know that, we feel good about what's going on at ClearBridge, but also what's going on with our global distribution platform.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

And our next question comes from Robert Lee with KBW.

--------------------------------------------------------------------------------

Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [5]

--------------------------------------------------------------------------------

Can you maybe talk a little bit about kind of the alternatives platform. I mean, I know you talked a little bit about the redemption of Clarion. But if we think of EnTrust, then I guess -- what I guess is a continued run off of the legacy Permal business and RARE's kind of struggle to get inflows. I mean, how should we be thinking of there being may be more light at the end of the tunnel at least with EnTrust and Permal kind of winding through the -- whatever the legacy book may be. And then is there anything -- maybe a bit more color on Clarion redemption in terms of was that advisory account had kind of a similar fee structure to kind of a core business, or how should we be thinking of that?

--------------------------------------------------------------------------------

Joseph A. Sullivan, Legg Mason, Inc. - Chairman, CEO and President [6]

--------------------------------------------------------------------------------

Sure. Good -- great questions. And when you talk about are we going to see daylight, we see a lot of daylight for all 3 of these, candidly. Couple of things, Rob. Let me just say this that I think are important to remember. As we've added alternatives capability to our lineup, to our portfolio, we've had to adjust to these new businesses, as new businesses. In other words, we've had to introduce the notion of uncalled capital to our unfunded wins. That's not something we used to talk about, but we've added that to it, and we currently have, I think, $2.9 billion across the alternatives platform in uncalled capital. But that's a new metric that we track and we share with you. Certain of our performance fees, as Pete talked about last quarter, certain of our performance fees that we accrued now have somewhat differing accounting implications and we've got a -- we described that to you. So that's new for us. We also have to think about our AUM activity at both Clarion and EnTrust in different ways, not just flows but also realizations. And so we're going to have to begin, in some cases, reclassifying certain things not as outflows because they're not. They're when we've actually achieved realizations for our clients, much in the way a private equity firm does, for example. So it's all good, but it is change for us, and we just had to adjust to that change this past year. When I think of -- let's take our alternatives portfolio in 3 ways. First of all, candidly, yes, RARE has been a bit frustrating from an institutional standpoint. But I would say it's been exciting and a lot of work being done from a retail standpoint. The outflows at RARE have been a combination of performance-related decisions, candidly, as well as, though, I think significantly some relocations from listed to unlisted infrastructure. It's all disappointing because they're out. Those reallocations can go the other way too, but I think the combination of some performance challenges but also reallocations have hit us on the institutional side. On the retail side, we've mentioned this before, but we're very pleased with the flows that we've gotten into our RARE U.K. infrastructure fund over the last year, and we're excited about the long-term potential of both the '40 Act fund that we launched in the U.S. as well as their smart beta ETF, which utilizes their proprietary index that we've launched this past year. These are both early-stage initiatives and products, but we're excited about them. And their pipeline of activity has been strong. Now they've got to convert it, and hopefully they will. But the interest in RARE, institutionally, I would say is strong and performance has rebounded and they're doing well from that standpoint. I would say both Clarion Partners and EnTrustPermal themselves are performing exactly as we expected, and we couldn't be happier. I will be honest, we did not expect or foresee the pressure on hedge funds and on the co-mingled space, in particular. We didn't expect that, that was going to be as intense as we experienced this past year, but we dealt with it, and everybody dealt with it. But what we love about the new combination of EnTrustPermal is what I would call the mutual diversification that each company brought to one another. That's in terms of products and vehicles and in terms of clients. And so EnTrust brought to this -- to the combination a focus on direct lending, a focus on co-investment strategies, and I'll get to that in a minute. Whereas in a really U.S.-centric business or as Permal brought really a very strong relationship internationally. We just met recently with Gregg Hymowitz, and he was talking about that. They have something on the order of 700 clients globally. So it's a powerful distribution capability. After a long year of integration at EnTrust, I got to tell you, they're totally focused on growth, they have launched a direct lending product globally and they are in the pre-marketing stage for a new co-investment vehicle. The commitments for both of these -- the indications for both of these are strong. And I would say on the co-investment vehicle, I think the commitments would close sometime in the fall. So we should start to see some flows into the direct lending vehicle anytime really, and I would say over the next month or so. And then we should have a good sense for the raise on the co-investment vehicle in the fall. Clarion, very quickly. Again, that's exactly what we expected. It's a world class real estate business, commercial -- private equity commercial real estate business. It's exactly what we expected and what we underwrote, and it is delivering just as we expected. I would say, if there is a surprise, at least to me, it's the demand for their capabilities, the foreign demand is stronger than I would’ve expected across 3 different continents outside North America. And their performance remains strong. They do expect the market to soften a little bit, but really soften from an extraordinarily high performing market range to more of a normal market range in the, call it, 8% to 10% return, something like that. The outflow that you referenced was an advisory mandate. It was a fee that was commensurate with an advisory mandate and it was with a very good client, where, frankly, we were capacity constrained a little bit. And so frankly, we view this as an opportunity to be able to compete for a new mandate, it's not going to be given to us, we got to compete for it, but something where we can add more value to the client than simply just as an adviser. So it's not anything that we're particularly concerned about. With Clarion, just -- they're so well diversified, such a great business that we're very happy. And prior to that outflow, we had seen 3 consecutive quarters of positive net flows the first 3 quarters with us. So I think all good on all those fronts -- ups and downs like all of our businesses, but we feel very good about all 3.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

And our next question comes from Dan Fannon with Jefferies.

--------------------------------------------------------------------------------

Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [8]

--------------------------------------------------------------------------------

Appreciate the color there on the alternatives segments and the various managers. I guess, if you could walk through kind of the unfunded wins at kind of Western, and I think you talked a bit about ClearBridge already. And just kind of talk about the -- any shift in maybe products or changes within various strategies? And then if there is anything you want to -- that's worth calling out for the month to date or kind of -- as you kind of think about this next quarter on a more shorter term basis?

--------------------------------------------------------------------------------

Joseph A. Sullivan, Legg Mason, Inc. - Chairman, CEO and President [9]

--------------------------------------------------------------------------------

Sure. So let me give you some thoughts on flows, and stay with me, because I think it's always important. We try to give you all as good a color as we can with respect to flows. So the big picture from my standpoint or from the Legg Mason's standpoint is this. First of all, it's interesting, flow leadership, and we think about this because we're at fiscal year-end a little bit. But flow leadership at Legg Mason actually seems to rotate from year-to-year, which, frankly, reinforces our diversification strategy as benefiting both clients and shareholders. So for example, this fiscal year, from a flow perspective, it is Western and Martin Currie, right? With $12.5 billion or $12.6 billion and $5.2 billion, respectively, which have led the way. Last fiscal year, Brandywine had $5.3 billion in and QS had $4.8 billion, and they were our net flow leaders. 2 years ago, not last year, but 2 years ago, in our fiscal '15, again, it was Western at $8.9 billion in, ClearBridge at $6.4 billion and Brandywine at $13 billion. So different years, different markets, different client demand, all drive different flow leadership for us at Legg Mason. But as I've said to all of you, given our diversification by the -- by -- the diversification by book, by asset class, by geography, by client type, trying to extrapolate monthly or even quarterly flows to the full year, I think almost certainly can -- or at least runs a risk of leading you to a wrong conclusion. So if we look at -- just talk about last year for a moment and how extrapolating a micro-view, can be a mistake. I think what you see is a pretty powerful story for Legg Mason. So for our fiscal year and for the 12 months' period ended March 31, and again, against a very challenging backdrop for flows in the active equities and fixed income space, we were out $1.6 billion for the year. Legg Mason was out $1.6 billion for the year. That's less than 1/2 of 1% or really relatively flat against our long-term book. But that $1.6 billion out includes alternatives, which we've talked about and acknowledged, we had some outs during the year. And so if you look at it, our active equities and active fixed income book over the course of our last fiscal year actually had positive net flows for the year of $5.8 billion, $5.8 million in active and positive active flows last year. And to me, that's a bit of a wow. But if you were using our monthly or quarterly flows to project where we'd end up the year, you would never have gotten there. Because if you think about it, if you go back and just look back a little bit, we ended the first quarter of our year, a year ago at this time, out $1.1 billion. We were relatively flat in the second quarter at out $300 million. We were out $4 billion in the third quarter, and some of you were wigging out. And we had -- but then we were positive $3.9 billion in the fourth quarter. So it's the lumpiness, particularly of our larger institutional flows, which actually stand in contrast to our global retail business, which, as I mentioned earlier, that business has been net sales positive for 13 of the last 14 quarters and was positive every single month during our last fiscal year with the exception of November and January. So if you look forward to April and our first fiscal quarter, we are continuing to see strength in our global retail business, though I would say we do expect some slowing of what has been just a blowout performance at LMJ, what we LMJ, Legg Mason Japan, that's really been with Martin Currie and the Australian high dividend strategy. We expect that's going to slow a little bit. But so far, it hasn't, but we sort of expect that it will. We do also see some institutional outflow on the fixed income side, which I would say is largely corporate cash management driven. It's not really reallocations, it's not really -- certainly not performance. We will see over the course of the rest of the month and quarter certainly some rebalancing, some ins and outs over the period. I am -- if I had to guess right now, about April, I'd put us at out about $2 billion, but frankly, it's nothing that we're getting particularly worked up about again because we've talked about how lumpy some of these things can be. We do have some visibility into that rest of the quarter of ins and outs, and are hopeful that the -- that -- what we're feeling in terms of the ongoing strength of our day-to-day retail business continues. But honestly, I'm not seeing anything particularly substantial one way or the other through the quarter. So just some lumpier ins, some lumpier outs, and then just ongoing business day-to-day. But I'll leave you with this on flows, because I want to -- this is important, I think, in terms of unfundeds and that -- from that standpoint. This really reinforces the high level of activity that occurs on a quarterly basis, and frankly, which makes the forecasting of flows so challenging. I'd like to share with you our most recent experience, just over the last quarter or so with respect to unfunded wins. So if you remember, on our January call, we referenced both our 12/31 unfunded book of $7 billion, and then we updated you to our January 31 book, which stood at about $13 billion. February, just for the record, I don't know that we had an opportunity to disclose this, but our February unfunded wins stood at $13.7 billion. And then we closed March at $10.3 billion in unfunded wins. So quarter-over-quarter, December 31 to March 31, we went from $7 billion to $10.3 billion in unfunded wins. But along the way, we funded almost $12 billion of our pipeline and then added another 15 plus -- $15.3 billion or so in new wins. Now, of those wins and of our current book of, I'd say, $10.3 billion, I think, in unfundeds, we're up just as 2/3. Yes, 60%-ish of those would be in fixed income, and the balance would be largely in equities, but some in Alts. And I think that's a nice mix. That -- and remember now, this book of unfundeds doesn't include our daily redemption activity or subscription activity in our retail book. So as you can see, just a tremendous amount of activity of outflow, of inflow, of new business activity every day and every week, every month and every quarter. So hopefully that's given you kind of a good recap on where we are.

--------------------------------------------------------------------------------

Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [10]

--------------------------------------------------------------------------------

That is very helpful. And I guess, this is a follow-up for Pete. Performance fees, they came in a little bit better than what you guided for, for the quarter. You guide 1 quarter out, and I understand it's highly unpredictable and subject to a lot of variability. But if you think about the year and kind of the outlook for this year versus last and where performance sits today and/or where you are versus your high watermarks, can you give us a sense of kind on year-over-year basis how we should think about performance fees given we're on kind of more of an -- we should be, I think, at least on a more of an upswing in fiscal '18?

--------------------------------------------------------------------------------

Peter Hamilton Nachtwey, Legg Mason, Inc. - CFO and Senior EVP [11]

--------------------------------------------------------------------------------

Yes, good question, Dan. Thank you. So again, I always emphasize the difficultly of predicting these because they are so subject to markets. And we've got a large swathe of our affiliates, I think, more are getting performance fees. But the historical run rate we've typically talked about is around $20 million per quarter. I'd say we're probably a quarter or so away in the couple of the strategies that if they -- if we keep normal markets and particular things that are in the legacy Permal that are fixed income oriented that we can get back to that level. But the other you're going to see in there, there's 2 kind of conflicting trends going on, one is, I think all of you are aware that the deal that we did with Clarion was an incentive fees on existing AUM that were in their 5-year kind of earnings period. Those are going to stay with the team, and we try and to break those out very clearly. But they need to run through revenue and run through comp expense. So we call those out for you. The other thing that's going on is in the hedge fund world and particularly in the products that EnTrust is out marketing now, that as Joe said, they've got great demand for those things. Then part of that is performance and part of it is also their willingness to structure things in terms of performance fees in ways that are very client friendly. And that includes having a clawback feature to those that will prevent us from recognizing those for GAAP purposes, but we'll be starting to disclose those as they get into the tens of millions of dollars. So that once they're out of the clawback period, those will come into the P&L. So again, difficult to give you a precision, but I think we're comfortable overall with that kind of $80 million a year kind of run rate in a typical year, but it's going to take us a little while to get kind of back to that high watermark level.

--------------------------------------------------------------------------------

Joseph A. Sullivan, Legg Mason, Inc. - Chairman, CEO and President [12]

--------------------------------------------------------------------------------

Pete, do you want to mention also because an increasing amount of AUM at EnTrustPermal is available for performance funds -- eligible for performance funds.

--------------------------------------------------------------------------------

Peter Hamilton Nachtwey, Legg Mason, Inc. - CFO and Senior EVP [13]

--------------------------------------------------------------------------------

Yes. Well, the increasing amount and virtually everything that Gregg is doing, the legacy stuff that he brought over with him from the stand-alone EnTrust is eligible for performance fees. And I think, virtually everything that they're marketing currently is going to be having a performance fee element in it. That's one of the things that just puts them in the sweet spot, and why they're very, very active in terms of being able to raise money now.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

Our next question comes from Craig Siegenthaler from Credit Suisse.

--------------------------------------------------------------------------------

Craig William Siegenthaler, Crédit Suisse AG, Research Division - Global Research Product Head for the Asset Management Industry [15]

--------------------------------------------------------------------------------

It's Craig Siegenthaler here from Credit Suisse. So just I want to follow up on the comp ratio guidance of 55% to 56% next quarter. If we go out 1 additional quarter with the annual incentive awards subsiding, where do you think the comp ratio settles in, in the September quarter? Because, I think, we'll have these full expense cuts from the EnTrust-Permal merger in at that point, too.

--------------------------------------------------------------------------------

Peter Hamilton Nachtwey, Legg Mason, Inc. - CFO and Senior EVP [16]

--------------------------------------------------------------------------------

Yes, that's fair. We -- typically the comp ratio is going to be elevated in the first 2 calendar quarters because of the seasonal impacts. And right now, just with the aging of our workforce to a certain extent, the one thing that's had more of an impact in the last couple years have been retirement eligible people. So these -- once they get within 3 to 4 years of their retirement age, anything that we award them even though they intent to work, we have to immediately expend. So that hits in the -- with the May time frame when we do our bonuses. But specifically, in terms of September, we expect getting down around the 53% level, maybe a little bit lower and same thing at December. So all in, on an annualized basis, should be still seeing a comp ratio that's in the 54% to 55% range.

--------------------------------------------------------------------------------

Craig William Siegenthaler, Crédit Suisse AG, Research Division - Global Research Product Head for the Asset Management Industry [17]

--------------------------------------------------------------------------------

Got it. And then should we expect any more integration expenses or MEP charges for the remainder of the year?

--------------------------------------------------------------------------------

Peter Hamilton Nachtwey, Legg Mason, Inc. - CFO and Senior EVP [18]

--------------------------------------------------------------------------------

So for the next fiscal year, you mean that we just ended last year. So -- and Royce, as I've indicated in my remarks, Royce still has 3 percentage points of their share of the revenue that they get equitized. Again, it won't change anything from a cash standpoint, but once you equitize it, that could cause a GAAP charge. And it's really at their option. We get to approve it, we have a Board that they go through, that is populated with Legg Mason folks. So they just don't get to do whenever they want to, but typically when we would expect them to do it in the March quarter each year unless there was some unusual factor that might cause them to do it at a different time. And again, where we can signal that we will. But in reality, it just really doesn't mean anything. I mean, it's GAAP accounting noise because it doesn't change the amount of cash that we get coming up to the parent level. And then just trying to think if there's anything else. Right, you asked about the transition. They're still -- we had hoped to actually for this quarter to be the last one that we talk about EnTrustPermal transition cost, but some of them got deferred into the first quarter of next year, which is one of the reasons for the kind of the earnings variance from consensus. So it's probably still going to be big enough that we'll be talking about it next quarter, but after that, we'll be done.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

And our next question comes from Mac Sykes from Gabelli.

--------------------------------------------------------------------------------

Macrae Sykes, G. Research, LLC - Research Analyst [20]

--------------------------------------------------------------------------------

It's Mac Sykes from Gabelli. Can you just talk a little bit more about the ETF strategy and specifically as it relates to the ClearBridge all cap growth ETF? Maybe talk about the cost difference with the comparable mutual fund offering? And then how do you think about cannibalization dynamics with like products as you go forward versus adding just separate more unique ETF offerings?

--------------------------------------------------------------------------------

Joseph A. Sullivan, Legg Mason, Inc. - Chairman, CEO and President [21]

--------------------------------------------------------------------------------

So a couple of things. When I think about -- and actually Mac, I should probably -- Alan probably doesn't want me to front run this, but I think we're thinking about doing a little bit of a lunch with Legg in the next month or so, and really featuring Tom Hoops, Rick Genoni, and maybe Dan McCabe from Precidian, to help people really understand our ETF strategy. We're attacking it, in my mind, sort of on 4 different fronts. The first one is, as you know, we've been in the market, we initially went into the market with 4, and I believe we're up to 7 now, smart beta ETFs. And we're having some success with those, particularly our low-ball-high-dip strategy is beginning to build some decent size. And we've got some interesting potential wins that could come in and could boost those. So we're excited about those, they're performing as we would expect and the ramp periods it takes a while, but we feel good about those. So we've got 7 strategies in the marketplace. We have announced that we are filing, and so the second bucket is for fully transparent active ETFs. And in those cases, we have to be thoughtful a little bit and work with our distribution partners in terms of which strategies we think are best there. And particularly, the one you singled out with respect to ClearBridge is a strategy that really doesn't -- actually is a strategy that we market through the SMA vehicle but really doesn't have a mutual fund vehicle. And so that seems like a natural one to introduce. But one of your question was interesting, Mac, because you said what about the pricing differential? And I think this is really important to understanding our business. If you go back to what I talked about in my prepared remarks, I mentioned that roughly 50%, almost half, not quite half, but almost half of our retail sales in the U.S. this past year were in vehicles other than the mutual fund business. And it's something that I've been talking about for a while, which is if all you do is track MorningStar data and ins and outs in mutual funds, you're not -- you're going to only get a portion of the Legg Mason picture because so much of our business and, frankly, an increasing part of our business is coming through, in particular, the SMA vehicle. I think I mentioned that we had a record year in terms of the retail SMA in the U.S. And that is reflecting a couple things. One, it's in some respects a very highly attractive vehicle because of the tax efficiency of it, there are pricing differentials between those and mutual funds, they obviously come with minimums. And so not -- you can't necessarily have a separately managed account with $1,000. But -- so they come with minimums, but you have opportunities for tax efficiency, for more customization in some cases. But my point about that is that the pricing differential, frankly, between the SMA and the ETF will not necessarily be that significant. Well, I'm not going to make the next conversation because I was going to say it might actually be higher on the ETF, I'm not sure. But for us, the significant growth of our retail business, the fastest growing part of our retail business, has -- in the U.S., has been the SMA. And so we don't -- we ultimately get asked about cannibalization. The reality is, we think for clients, we need to be vehicle agnostic. I mentioned it over and over again about choice. We want to provide clients choice, not just in strategies, but in vehicles. If they want to buy our strategies through the mutual fund, terrific. If they want to buy them in SMA, terrific. If they want to access them through an ETF, we want to see if we can try to do that. So we really prefer as best we can to be vehicle agnostic in that. Then so you've got active transparent ETFs, we mentioned Precidian filed for nontransparent ETFs along with NYSE Arca, and we're in the process and working with the SEC on that. We're hopeful. We're very pleased that we signed a licensing agreement most recently with JPMorgan. And we continue to see that the industry validates by virtue of the licensing agreements that Precidian is signing, validates the technology that Precidian has with respect to nontransparent active ETFs. So smart beta, fully transparent ETFs, nontransparent active ETFs, which we're hopeful of getting through the SEC over the course of the next year. And then as I mentioned, we just filed through the SEC a fully hedged structure for ADRs, and we think that's going to be a very interesting product. So those are kind of specialty products. We've got the specialty products, transparent, nontransparent and then smart beta ETFs.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

Our next question comes from Michael Cyprys from Morgan Stanley.

--------------------------------------------------------------------------------

Michael J. Cyprys, Morgan Stanley, Research Division - Executive Director and Senior Research Analyst [23]

--------------------------------------------------------------------------------

Just on the SMAs, just want to dig in there a little bit, if we could. Just as that grows, how should we think about the incremental margin on those SMA sales versus other vehicles, say, such as mutual funds and just any color you could share just in terms of embedded cost around that and just any color we should be thinking about there on the cost side?

--------------------------------------------------------------------------------

Joseph A. Sullivan, Legg Mason, Inc. - Chairman, CEO and President [24]

--------------------------------------------------------------------------------

Right now, a couple of things. One, we are the second largest total provider of retail SMAs in the U.S. within the industry, where one of the areas where we're growing is in model delivery. And that's an area where, frankly, there are no really -- they're not significant, if any, really incremental costs. Now the fees they are going to be a little bit lower, but it's all about where the implementation is done. And so in model delivery, we hand off the implementation to the distribution partner. Otherwise, it's just kind of the initial SMA business, we do the implementation. We're happy to do either. Increasingly, I think that model delivery is what is increasing. It's a good business, it's an attractive business, it's an institutionally priced business. And again, it's -- I don't know that I want to get into the exact fee rates on it, but it's a decent business and we've been doing it for a long time. So it's embedded already into our fee rates in a significant way. And I think you're going to see it grow. I think this is -- by the way, this is, I think, DOL-linked, right? So it is a -- the SMA business is one that I think responds to a lot of the -- whether DOL and whether it actually goes through or whether it's actually modified or whatever. The trends underlying the DOL are still there. And so the SMA vehicle responds to many of those in terms of pricing, because the pricing is certainly less than a mutual fund, but it's a response to the -- to really a lot of the issues around the DOL. And the last piece really, Michael, the last piece is the persistency. Typically, we see the persistency of the retail SMA to be greater than of the mutual fund. It's just not traded as frequently as the retail mutual fund.

--------------------------------------------------------------------------------

Michael J. Cyprys, Morgan Stanley, Research Division - Executive Director and Senior Research Analyst [25]

--------------------------------------------------------------------------------

Great. If I could just follow-up question here, Joe. You mentioned that winning requires having products that are competitively priced, I guess the SMAs plated that as well. But just as you're thinking about your product portfolio here today, which products would you say are more competitively priced versus others? And where do you see an opportunity to be a little bit more competitive on? And just how do you see your fee structure evolving for the industry and for Legg Mason?

--------------------------------------------------------------------------------

Joseph A. Sullivan, Legg Mason, Inc. - Chairman, CEO and President [26]

--------------------------------------------------------------------------------

Look, I think it's clear that fee -- there's going to be pressure on fees. We know that. That's not new. I think, as it relates to, particularly our retail book, our mutual fund boards have an annual requirement to review profitability of the funds and of the fund providers. And so we review the competitiveness of those products on a regular basis. You saw recently Western make some adjustments to some of their funds, ClearBridge has done that in the past. So I don't feel like we need to go in and take a machete to the fee rates on our products. Now there's going to be continued pressure, and the passive space continues to kind of pull down overall fees. There is more price competition as people are competing for business. But look, the large institutional mandate that ClearBridge run, one was a more institutionally priced mandate, that's just the nature of the business right now. So I don't see at the moment that we've got in -- where we're massively overpriced in a significant part of our books. And quite frankly, our mutual fund boards can't permit that anyway.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

And our next question comes from Patrick Davitt from Autonomous Research.

--------------------------------------------------------------------------------

Patrick Davitt, [28]

--------------------------------------------------------------------------------

On the Precidian point you made, to the point you made, it does look like there's been some positive movement on that front, be it the JPMorgan support, the filings you made. Should we take this to mean you're seeing movement on the approval front? And within that vein, do you have a better sense of the timelines to getting approval and do we need all of the commissioners in place for that to happen?

--------------------------------------------------------------------------------

Joseph A. Sullivan, Legg Mason, Inc. - Chairman, CEO and President [29]

--------------------------------------------------------------------------------

I don't think you need all the commissioners in place. But I -- look, I don't want to handicap it because it's trying to project when a government agency is going to do something, and they've got a lot of competing demands and all that kind of stuff. We reset the clock with them when we refiled, when Arca -- NYSE Arca refiled and we refiled with them and we kind of reset the clock on that. And I just think we're excited about getting back in front of them and talking about it. And then again, I think the industry is validating. The client list of licensees that Precidian has for this technology is pretty impressive. And I think it's indicative that the industry says, "No, this is the one. This is a great technology." So I think we're going to get a good hearing. But you know what, I'd love to be able to give you a read because that mean I would really know, but I can't tell that for sure.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

And our next question comes from Michael Carrier from Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [31]

--------------------------------------------------------------------------------

Pete, I guess, just on the margin, and I know this quarter there was a lot of items in there and you clean them up for us. But I think it's still maybe a little north of 22%. And I know there's seasonality with comp. I just wanted to get your sense given that you're kind of pulling all this stuff together that you guys have done over the last couple of years, and we're not going to have as many charges going forward. How should we be thinking about where the margin you can go maybe over the next 12, 24 months. Just given that, I think, there was the potential of maybe you getting 25-plus, I mean, just wanted to see based on where you are today, what you're seeing, where you think the potential is?

--------------------------------------------------------------------------------

Peter Hamilton Nachtwey, Legg Mason, Inc. - CFO and Senior EVP [32]

--------------------------------------------------------------------------------

Sure, a couple things there, Mark. The -- one, in terms of where it can go from here, if you adjust for all the kind of noisy things that we had in the quarter, you're probably going to be able to get to the number that's more in the 25% to 26% range. The other thing that we've started disclosing annually, as I mentioned, and it's in the back of a deck, I'm going to say it's Page 30 or 31, what the parent margin is. Because at the end of the day, we don't control about 60% of the cost structure because that, on average, is what goes to the affiliate. So whether they spend it on facilities, or they spend it on travel, they spend it on comp, it's all going to be a cost. So the thing that we really manage and focus on is the corporate cost. And you will see that we've been able to not only manage those very tightly, they're actually down outside of distribution. So we freed up resources to invest in distribution and then we've been able to kind of hold the line on costs that come in at the corporate level. So yes, I -- it's always dangerous to try and predict margin in the future, particularly given the top line is so susceptible to market forces. But with normal markets, can we get in the upper half of the 20s? Yes, without a doubt.

--------------------------------------------------------------------------------

Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [33]

--------------------------------------------------------------------------------

Okay. And then just on the nonop, I think you guys you had the gain on the sale in there. But it seems like elevated. Anything else that drove that or just given the stronger markets in the quarter?

--------------------------------------------------------------------------------

Peter Hamilton Nachtwey, Legg Mason, Inc. - CFO and Senior EVP [34]

--------------------------------------------------------------------------------

Well, nonop, it's -- there were actually 2 sales that went through there that had an impact. And then, obviously, some seed capital and the impacts from that in terms of the mark-to-market on seed and the FX impacts. So it's really a combination of those 3 things.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

And our final question comes from Glenn Schorr from Evercore ISI.

--------------------------------------------------------------------------------

Glenn Paul Schorr, Evercore ISI, Research Division - Senior MD, Senior Research Analyst and Fundamental Research Analyst [36]

--------------------------------------------------------------------------------

So I like seeing the flows in equities and fixed income. I want to circle back on the old conversation. And I don't need you to repeat all the good color you gave us. I'm just struggling, I think, if I got this right, the last 6 or 7 quarters have been an outflow in aggregate. If these are growth to your asset classes, I like the companies that you bought. Is there, within your comments, is there -- some of it is actual distributions rather than outflow? It's just a head scratcher to see the right product coming through a good, bigger global channel being outflow. So I'm just trying to tie those thoughts together.

--------------------------------------------------------------------------------

Joseph A. Sullivan, Legg Mason, Inc. - Chairman, CEO and President [37]

--------------------------------------------------------------------------------

Yes. It's good. I mean, it's a fair question, Glenn. First of all, no, I would not see any of what we've reported as outflows as being distributions at this point in time. And we will -- distributions or realizations, I think we're going to be looking to call those out in the future as we see them. Look, I think the biggie here, there's a couple of biggies, right? As I mentioned, RARE on the institutional side, yes, it was a little bit of that performance, I think, in one particular case it was. I think in more of the case there was in this toggling between listed and unlisted. A lot of times what investors in infrastructure will do is park their money in listed infrastructure while they are waiting an opportunity on unlisted. And I think there were some of that, that transpired. And so we could be a beneficiary of that with somewhere down the road when an institution wants to allocate into infrastructure and doesn't have an unlisted opportunity they can park it with us, so we could be the beneficiary of that, but that's going to be a little lumpy. I think the biggie here, the Clarion thing, I wouldn't even think about twice before, to be honest with you. Again, an advisory mandate, relatively a fee that's commensurate with that. And frankly, one that gives us an opportunity to provide more value to the client because we were kind of at capacity with that client. So we're not -- we don't give that one a second thought. I think as it relates to EnTrustPermal, we -- I would say there's a couple of things there. One, was that we did a transaction, we brought 2 firms together. And whenever you do that, you take the risk that there will be some leakage as a result of the deal. That risk is enhanced if your performance is iffy, and frankly, there's not a lot of hedge funds or fund-to-funds that perform particularly well, and we had some that performed kind of okay to not great. And so our performance was okay at best, just on a transaction. And then there was just there's massive sort of negative sentiment around hedge funds generally and also fund-to-funds and co-mingled products. And so we were doing a deal at a time when there was a lot of negative sentiment on hedge funds, on performance, on co-mingled vehicles. And so the biggest out in -- that we've had in headwind that we've had to deal with, with respect to alternatives has been at EnTrustPermal. Again, some of it as a result of the deal, some of it as a result of the market. I'm not trying to just gild the lily here. We feel really good about the opportunities for growth as it relates to different products. Again, the co-investment vehicles and the direct lending products. And then, in both cases, actually Clarion and EnTrustPermal have been most recently positive with our global retail distribution platform. Now that's small, and I don't want to overstate that, but it's absolutely going to be building at both EnTrustPermal and Clarion. We can absolutely see it, and it's -- I don't want to suggest it's going to necessarily be billions next quarter, but it is going to be building. And so that thesis of the high net worth investor allocating increasingly into alternatives into real estate, we believe actually is going to happen, and we're seeing it. Modestly, but we are seeing it. Is that helpful?

--------------------------------------------------------------------------------

Glenn Paul Schorr, Evercore ISI, Research Division - Senior MD, Senior Research Analyst and Fundamental Research Analyst [38]

--------------------------------------------------------------------------------

That is definitely helpful. I appreciate that.

--------------------------------------------------------------------------------

Joseph A. Sullivan, Legg Mason, Inc. - Chairman, CEO and President [39]

--------------------------------------------------------------------------------

Okay.

--------------------------------------------------------------------------------

Glenn Paul Schorr, Evercore ISI, Research Division - Senior MD, Senior Research Analyst and Fundamental Research Analyst [40]

--------------------------------------------------------------------------------

Vanguard fee wasn't disclosed, correct?

--------------------------------------------------------------------------------

Joseph A. Sullivan, Legg Mason, Inc. - Chairman, CEO and President [41]

--------------------------------------------------------------------------------

Correct.

--------------------------------------------------------------------------------

Glenn Paul Schorr, Evercore ISI, Research Division - Senior MD, Senior Research Analyst and Fundamental Research Analyst [42]

--------------------------------------------------------------------------------

Okay. Last one, debt-to-EBITDA now? So EBITDA came down, but you talked about some of the capital allocation split going forward, a little more dividend than buyback, but curious on where debt repayments fits in?

--------------------------------------------------------------------------------

Peter Hamilton Nachtwey, Legg Mason, Inc. - CFO and Senior EVP [43]

--------------------------------------------------------------------------------

Yes, this is Pete. Thanks, Glenn. So EBITDA obviously came down because of some of the seasonal factors and the variety of a bit of noisy items. But in general, our trend on EBITDA is actually very strong. And as we've said in the past, we expect to be able to get that EBITDA leverage ratio, the headline number down below 2, I think going into the next fiscal year, assuming normal markets. And I think, again, it's a great deal for the -- for our shareholders because we financed pretty much all the last 3 acquisitions that we did with that debt, and so we've added a significant amount of EBITDA and now that we're passed the onetime cost to get EnTrust and Permal merged, really should start seeing that paying dividends for our shareholders. And then in terms that you mentioned the split on, as Joe articulated, we were very comfortable at the level of capital that we're returning at the moment. Again, assuming normal markets and assuming there aren't other opportunities to invest the money. But $450 million has been -- the rate of return of capital for us has been league-leading in the past, and we think that's still a really great part of the Legg story. And it's one that our debt-holders and the rating agencies are very comfortable with. And then, I guess, the first, in terms of the specific opportunity of delever outside of doing something a little more exotic like a defeasance. But our next debt repayment, scheduled repayment is in June of 2019. Those were 5 year notes we issued back in 2014. So we have $250 million that we'd actually be repaying at that point.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

That concludes our question and answer session. I would like to turn the floor back over to Mr. Joe Sullivan for closing comments.

--------------------------------------------------------------------------------

Joseph A. Sullivan, Legg Mason, Inc. - Chairman, CEO and President [45]

--------------------------------------------------------------------------------

Nicole, thank you. And I want to thank everybody for listening this evening. I know we've gone a little bit long. Ironically, I think Pete and I went the shortest we've ever gone, and we went the longest with Q&A. So maybe that's a good thing. Anyway, I would like to thank you all for listening. I'd like to thank my colleagues throughout Legg Mason and our affiliates for really what was a, I think, a very solid year of both activity and business and strategic progress. And I want to particularly congratulate the affiliates and Legg Mason on all the various awards and recognition that we won this year. I do look forward to updating you again on our progress again next quarter. So with that, we'll end the call. And again, thank you for your interest in Legg Mason.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

This concludes today's teleconference. Thank you for your participation. You may now disconnect your lines at this time.